Archives: 07/2012

Fair and Balanced, Think Tank Edition

The website allows you to track the use of words uttered by members of Congress. Our intern wrangler, Michael Hamilton, decided to compare uses of the term “Cato Institute” to the names of other think tanks around town. Here’s what he found:

Cato is mentioned roughly equally by both Republicans and Democrats in Congress. It’s hard to draw conclusions based solely on members’ use of the names of think tanks, but it seems clear that Democrats and Republicans make roughly equal use of Cato research in making appeals to their colleagues and the public.

Note: The Brookings Institution is sometimes misstated as “Brookings Institute,” so both are included.

Break Up the Banks? Be Careful of What You Ask For

One of the architects of today’s big banks, Sandy Weill, who helped build Citibank into the behemoth it is today, has come out and called for breaking up the largest banks “so that the taxpayer will never be at risk, the depositors won’t be at risk.”

If only it were so simple.

Weill should remember the savings & loan crisis of the late 1980s and early 1990s. That crisis mostly involved small institutions, yet it cost taxpayers a lot and did significant harm to depositors. Perhaps Weill believes the 400+ small banks that have failed in the current crisis had little effect on the economy. While I admittedly haven’t run the numbers, it’s hard for me to believe that 400+ bank failures did not have some negative macroeconomic effects, in addition to being very expensive for the Federal Deposit Insurance Corporation.

In fact, I would argue that the single largest problem facing the banking industry before this crisis was a lack of geographic diversification. Our long history of extensive branch banking restrictions kept banks small and extremely vulnerable to local and regional downturns. Fortunately, we deregulated that area in 1994. The result has been a more stable financial system.  Would Wells Fargo even be standing today if it had been limited to the California housing market (where Wells Fargo got its start)?

Weill needs to tell us, if we were to break up the banks, where exactly will that risk go?  It isn’t going to just disappear.  As I’ve argued elsewhere, one result of our small, fragmented 1920s banking system was the creation of Fannie Mae, the Federal Housing Administration, and the Federal Home Loan Banks.  Need I remind Weill that the current bailout of Fannie and Freddie is at least $180 billion and counting, far exceeding the costs of all other rescues in the recent financial crisis combined?  If we’d had bigger banks in the 1930s, we could have avoided the creation of such disasters as Fannie and Freddie and the FDIC (witness the stability of Canada’s diversified banking system, both in the 1930s and recently).

The most effective solution to risk-taking by big banks, as I’ve argued elsewhere, is to stop trying to micromanage what risk banks are taking and start pulling back their safety net. It is largely the moral hazard created by various government guarantees protecting “Too-Big-To-Fail” banks that caused the most recent crisis. It’s time to start reducing, if not eliminating, those guarantees. Ultimately, Too-Big-To-Fail is a political problem, not an economic one. The solution is to be found in limiting government, not the banks.

A Success Story

The Campaign for Primary Accountability (CPA) is apparently bringing its efforts for the current election cycle to an end. As Politico notes, CPA “aimed to level the financial playing field, investing in primary races against entrenched and well-funded incumbents who in many cases had not faced serious reelection races in years.” They enjoyed unusual success. Four of the nine incumbents they opposed lost their primary races. They targeted incumbents from both parties. Moreover, their spending “left House members terrified that they would wind up in the group’s crosshairs.” As CPA founder Leo Lindbeck III remarked, the organization has proven that even entrenched incumbents could be defeated. CPA plans to return in the next cycle.

I expect we will see some campaign finance “reforms” proposed to deal with CPA. Potent threats to re-election attract attention from members of Congress.

Lindbeck has analyzed the maladies of Congress.

Rand Paul on the Surveillance State

Sen. Rand Paul (R-KY) gave a great speech on surveillance last week at FreedomFest. Actually, he gave two good speeches, but the one embedded below is his short 6-minute talk at the Saturday night banquet. He talks about our slide toward state intrusion into our phone calls, our emails, our reading habits and so on. You know how big the surveillance state has gotten? The answer is “a gazillion.” Watch the speech—complete with high-falutin’ references to Fahrenheit 451 and the martyr Hugh Latimer!

Obama’s Right—in a Perverse Way—about Government Playing an Important Role for Small Businesses

President Obama recently got himself in hot water with his “you didn’t build that” remark, which trivialized the hard work of entrepreneurs.

But he is right—in a perverse way—about government playing a big role in the life of small businesses. Thanks to a maze of regulations, the government is an unwelcome silent partner for every entrepreneur. And we’re not talking small numbers.

But sometimes an image helps to make things easy to understand. Here’s a chart from the Joint Economic Committee, which maps out the web of regulation imposed by Washington:

This chart does more than just show sources of red tape coming from Washington. It shows that “Washington” is really several entities, such as Congress, the executive branch, the courts, and so-called independent regulatory agencies. These entities then impose regulatory burdens in various fields, such as labor, finance, tax, and environment.

Keep in mind, by the way, that each small pink circle actually represents an entire field of regulation. So when you see, for instance, the “Obamacare” circle (below), what you’re really seeing is the nightmarish image of regulatory complexity.

And don’t forget the role of state and local government.

Last but not least, remember that each regulatory bureaucracy is capable of making individual decisions that … well, you judge for yourself:

Gee, it’s almost enough to make you think regulation might be the problem and not the solution.

For $460 Billion a Year, Medicaid Darn Well Better Save Lives

A study in this week’s New England Journal of Medicine finds that when three states expanded their Medicaid programs, mortality rates fell 6 percent relative to four neighboring states. The study found evidence that the mortality gains were concentrated in poorer counties – i.e., where people were most likely to become eligible for Medicaid.

As always, the study comes with caveats. The results “may not be generalizable to other states,” may have been driven by unobservable confounding factors, et cetera. Speaking only for myself, I hope these results are accurate. I hope Medicaid does save lives. That program spends nearly half a trillion dollars per year. It damn well better save lives.

Even so, that does not mean politicians should expand Medicaid. If saving lives is the goal, then politicians should instead find the lowest-cost way of doing so, because that enables the greatest number of lives to be saved with the available resources. It is generally accepted among health economists that other strategies (e.g., discrete health programs targeted at hypertension or diabetes) could save more lives per dollar spent than expanding health insurance. This study says nothing about how much it costs to save lives through Medicaid, much less whether alternative uses of those resources could save even more lives. It could be that other uses of the money would save – I don’t know – twice as many lives.

Absent evidence that Medicaid saves the most lives per dollar spent, expanding Medicaid does not show how much politicians care about saving lives. It shows how little they care about saving lives, because they are willing to forgo additional reductions in mortality for the sake of…whatever else expanding Medicaid gives them.

The Mayor of Boston Should Retract His Threats and Apologize

The head of a fast food chain, Dan Cathy, president of Chick-fil-A, is opposed to allowing gay people to create the mutual obligations and rights of marriage.  I disagree with him.  I’ve never eaten in one of his stores, so I couldn’t really boycott his business, but I can explain to him why I disagree.

What I would not do is to take any of his rights from him for his expression of his views.  He has the right to them.

The mayor of Boston has threatened to punish Mr. Cathy for exercising his right to express his views. He raked Mr. Cathy over the coals in a letter that was then posted on the City of Boston’s Facebook page.   In an interview with the Boston Herald  the mayor not only expressed his own opinion, which he is free to do; he went further and threatened to use his power illegitimately to deny the rights of Mr. Cathy and his partners, shareholders, and employees to do business in the city of Boston.

Opinion: “Chick-fil-A doesn’t belong in Boston. You can’t have a business in the city of Boston that discriminates against a population. We’re an open city, we’re a city that’s at the forefront of inclusion.”

Threat: “If they need licenses in the city, it will be very difficult—unless they open up their policies.”

I’m a supporter of the right of gay people to create mutual obligations and rights of marriage.  I’m a supporter of freedom of speech.  And I’m a supporter of freedom of enterprise.  I disagree (strongly) with Mr. Cathy and hope that he will change his mind.

Mayor Menino should retract his threats and, at the very least, apologize.  Mayor Menino is no friend of human rights.  His threat is tyrannical.